Women Directors’ Turnover Following Financial Misconduct: What's Social Environment Got to Do with It?
| Published date | 01 April 2023 |
| Author | Abubakr Saeed,Hammad Riaz |
| Date | 01 April 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12639 |
British Journal of Management, Vol. 34, 805–830 (2023)
DOI: 10.1111/1467-8551.12639
Women Directors’ Turnover Following
Financial Misconduct: What’s Social
Environment Got to Do with It?
Abubakr Saeed 1andHammadRiaz
2
1Comsats University Islamabad, Islamabad, 45550, Pakistan 2University of Poonch, Rawalakot, Azad Jammu
and Kashmir, Rwalakot, 10250, Pakistan
Corresponding author email: abubakr.saeed@comsats.edu.pk
In this study, we consider the role of social environment in boards’ decisions whether to
replace women directors or not following corporate nancial misconduct. To explain the
board’s decision, twocompeting hypotheses are presented. The immunity perspective sug-
gests that women directors benet fromgrowing social pressures to increase women’s rep-
resentation on boards, resulting in a lower turnover, while the susceptibility perspective
proposes that societal gender stereotypes that give rise to biased boards’ decisions result
in a higher turnover.Using a sample of Chinese rms involvedin nancial misconduct dur-
ing 2011–2019, we nd strong support forthe susceptibility perspective and show a higher
turnover of women directors following nancial wrongdoing. Further, wend that board
gender diversity and a rm’s belonging to male-dominated industries increase women di-
rectors’ turnover.Our ndings make important contributions to directors’ turnover liter-
ature and practice.
Introduction
The revelation of corporate nancial misconduct
provides a strong indication that a rm’s inter-
nal governance mechanism has failed to protect
the interests of stakeholders (Cowen and Mar-
cel, 2011). It inicts damage to a rm’s image
and undermines its legitimacy in the eyes of key
stakeholders (Naumovska and Lavie, 2021; Park,
Boeker and Gomulya, 2020). A widely adopted
approach to reintegrate with stakeholders and
restore the organizational tainted legitimacy is
removing the rm’s top executives (Gangloff,
Connelly and Shook, 2016; Pozner and Harris,
2016). As noted by Wiersema and Zhang (2013, p.
2), executive turnover can ‘symbolically distance
the organization from bad inuence’.
Indeed, past work on executive turnover shows
that directors experience higher dismissal after
the nancial scandal (Arthaud-Day et al., 2006).
The scholarly work examining boards’ decisions
to dismiss or protect directors has evolved into
two main streams. The rst stream views fraud-
ulent corporate outcomes as evidence that direc-
tors could not perform monitoring functions ef-
fectively, which triggers their dismissal (Gomulya
and Boeker, 2016; Wiesenfeld, Wurthmann and
Hambrick, 2008). Studies holding this view are
mainly grounded in agency theory (e.g. Gomulya
and Boeker, 2016; Pozner and Harris,2016), which
considers monitoring as a primary responsibil-
ity of directors, and misconduct signies that
they have failed to full a key obligation of that
role. The second stream of studies emphasizes
the resource-provision role of directors, which in-
cludes advising, connecting to important stake-
holders and provision of organizational legiti-
macy (e.g. Marcel and Cowen, 2014; Naumovska,
Wernicke and Zajac, 2020). The main premise
of these studies is that beyond monitoring func-
tion, the value of resources that directors bring
to rms must also be considered in understanding
© 2022 British Academy of Management.
806 Saeed and Riaz
the penalties for directors associated with nancial
misconduct.
While these studies are insightful in understand-
ing the factors that a board considers in address-
ing damage to its rm’s legitimacy, we know little
about howthe board’s response to nancial wrong-
doing is inuenced by the socio-economic environ-
ment surrounding the rm. The signicance of the
socio-economic environment in boards’ response
to misconduct is in line with the notion set forth
by Wiesenfeld, Wurthmann and Hambrick (2008,
p.231) thatboards’ decisions in the settling-up pro-
cess ‘often deviate widely fromthe straightforward
calculus of rationality and fairness’ and existing re-
search must acknowledge the ‘social factors that
inuence judgements about elites associated with
corporate failure’. However, there is a dearth of
studies considering the role of social environment
in such decisions. In a notable exception, Nau-
movska, Wernicke and Zajac (2020) consider the
mounting pressure for increased board diversity
and examine how such societal pressure that pro-
motes board diversity affects women and minor-
ity status directors in the aftermath of wrongdo-
ing. Their results show that social pressure grants
a reputational immunity to fraud-tainted women
and minority directors from the penalties in the di-
rectors’ labour market. In particular, women and
minority directors who served on the boards of
rms that are involved in misconduct, are more
likely to retain their board positions in other non-
fraudulent rms. Further, Wiersema and Zhang
(2013) consider two aspects of the social environ-
ment, namely, the media attention to scandal and
the pervasiveness of misconduct, in boards’ re-
sponses to stock option backdating scandals.
In this study,we recognize the role of social con-
text in the board’s response to nancial miscon-
duct and examine how a woman director’s gen-
der status inuences the board’s decision to replace
(or retain) a woman director following nancial
misrepresentation. The social environment inu-
ences subjective beliefs and therebythe judgements
of the board. For this purpose, we advance two
competing perspectives that are likely to be useful
in explaining the interplay of the social environ-
ment in the board’sresponse to nancial misrepre-
sentation: immunity perspective and susceptibility
perspective. The immunity perspective, grounded
in the institutional theory (DiMaggio and Powell,
1991; Scott, 1987) that highlights the importance
of legitimacy for rm survival, suggests that social
pressure for gender equality, particularly in leader-
ship positions, reduces the dismissal of women di-
rectors compared to their male peers. Importantly,
recent public and political events – such as the Fair
Pay Act, the MeTooPay campaign, Hillary Clin-
ton’s presidential campaign and Women’s March
– have drawn public and institutional attention to
gender equality in leadership positions. The re-
moval of a woman director in such an environ-
ment can threaten organizational legitimacy and
jeopardize access to important resources as it runs
counter to prevailing social norms that demand
higher board gender diversity. In contrast, from
the susceptibility perspective that is based on role
congruity theory (Eagly and Karau, 2002), women
have toface an exaggerated prescriptive stereotype
to be more ethical and are penalized more severely
than men for violatings ocietal expectationsof eth-
icality (Kennedy, McDonnell and Stephens, 2016).
Therefore, when an ethical breach occurs within
the rm, like nancial misconduct, women exec-
utives tend to be held more responsible for such
misconduct and face higher turnover than men ex-
ecutives. This perspective suggests that women di-
rectors are more susceptible to dismissal following
nancial wrongdoing. Beyond our main analysis,
we also test the extent to which the presence of
other women directors (board gender diversity)on
boards and the nature of the industry inuence the
immunity/susceptibility effect for womendirectors
associated with wrongdoing.
We empirically test our contentions using a
Chinese sample. We contend that conicting ten-
dencies exist in the institutional setting of China,
which provides fertile ground to test our compet-
ing hypotheses. On the one hand, globalization
led to the infusion of non-traditional norms and
values, such as board gender diversity, which are
promulgated by multinational rms and interna-
tional agencies. Consequently, the Chinese central
government tries to promote gender equality in
leadership positions and enacted ‘the Program
for Development of China’s Women 2010–2020’.
On the other hand, the Chinese traditional social
values system, which is based on Confucianism
philosophy, promotes a climate in which gender
equality is trampled (Du, 2016). These social
values advocate strict stereotypicalgendered roles,
expectations and behaviour towards women.
To test the proposed hypotheses, we used hand-
collected data of 103 Chinese rms accused
of nancial misrepresentation during the period
© 2022 British Academy of Management.
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